The global economy is currently described as “bending, not breaking” amidst the ongoing conflict in Iran, according to Jan Hatzius, the chief economist at Goldman Sachs. As the crisis enters its fourth month, concerns surrounding economic growth persist.
Hatzius pointed out in a recent report that discussions among market participants predominantly revolve around negative themes. This backdrop raises the question of why equity markets have remained resilient despite not being particularly inexpensive. Several factors help explain this paradox:
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Stabilisation in Oil Prices: Contrary to expectations, oil prices have not surged dramatically, largely due to an above-average inventory stockpile that predated the conflict.
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Limited Impact on Fuel Supply: While there have been regional shortages of products like jet fuel, the resulting demand destruction has been managed effectively. Airlines have responded by cutting back on less essential and less profitable flight routes.
- Support from AI and Fiscal Policies: The surging interest in artificial intelligence, coupled with supportive fiscal measures, has sustained the stock market’s upward trajectory, even following a slow start earlier in the year.
Despite these stabilising factors, risks remain, cautioned Hatzius. Goldman Sachs’s recession forecast for the coming year is still 5% higher than levels observed before the war. Economists at the firm anticipate a potential slowdown in consumer spending, influenced by the depletion of tax refunds, rising gas prices, and stagnation in wage growth.
Interestingly, the probability of a recession in the US over the next year has decreased from 30% to 25%, as indicated by Goldman Sachs’s research. Although initial GDP growth in the first quarter was lower than expected, private domestic sales have shown resilience, with April witnessing the creation of 115,000 jobs alongside a drop in initial jobless claims.
A vigorous earnings season has also facilitated new peaks for the S&P 500 and the Nasdaq Composite indices. Investors have remained optimistic, fuelled by long-term profit projections rooted in the productivity gains associated with the AI boom.
However, while AI benefits companies by enhancing efficiency, Hatzius warns that greater productivity could lead to fewer job opportunities relative to GDP growth. Additionally, the secondary effects of AI—such as rising electronics prices and more advanced software features—might exert upward pressure on an already persistent inflationary environment.
For investors, the current landscape presents a complex scenario. While the overall outlook remains positive, the supply of potential negative outcomes appears disproportionately larger, including risks of higher oil prices and broader economic adverse impacts. In this context, Hatzius emphasises the importance of navigating these uncertain waters with caution.
